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CBRE has released market trends for the office building market in 13 cities nationwide for the fourth quarter of 2011.

Noteworthy Trends

Low supply levels and relatively firm demand has contributed to a nationwide trend toward improvement in vacancy rates, which have remained flat in the 23 wards of metropolitan Tokyo.

The vacancy rate for Grade A buildings in Tokyo rose to 5.1%, with average assumed achievable rent falling 1.2% to 29,050 yen per tsubo.

In metropolitan areas nationwide, scattered cases of businesses relocating to upgrade their office spaces were seen, indicating a departure from uniform cost-cutting motivations.

Tokyo's 23 Wards

In Tokyo's market for Grade A building space, the completion of a relatively large-scale new structure in Shinjuku with vacancies remaining resulted in a 0.5 percentage point quarter-on-quarter increase in the vacancy rate to 5.1%. Amid these circumstances, rents in some buildings were observed being lowered in order to attract tenants. This in turn resulted in a slight decline in average assumed achievable rent of 1.2% from the previous quarter. However, new Grade A building construction absorbed much of the demand during the quarter, while new demand in Tokyo grew over the previous quarter.

The overall vacancy rate for the 23 wards of metropolitan Tokyo remained steady at 7.3%, keeping above the 7% level for a seventh straight quarter. Although some IT corporations relocated as part of business expansion efforts, most that relocated chose to do so in a cost-cutting effort through consolidation and integration. The market climate therefore is not defintively conducive for a reduction in vacancies among top-grade buildings.

Market Trends in Other Regions

In Osaka, demand for large-scale relocations has prominently grown. And amid a near complete lack of new supply, the vacancy rate fell 0.4 percentage point to 10.7%. Proactive upgrade efforts and other expansion trends among Osaka-based firms had already been contributing momentum to an observable strengthening trend, and indications are that rents have bottomed out.

In Nagoya, demand was absorbed mainly by buildings in superb locations and with particularly attractive specifications, resulting in a sixth straight quarter of improvement in vacancy rates. Against the backdrop of suppressed supply, demand is continuing to show a recovery trend.

In Sendai, market demand has already shifted from emergency relocation in the aftermath of the Great East Japan Earthquake to new entry and floor-space expansion supported by reconstruction assistance. Meanwhile, vacancy rates rose for the first time after the earthquake as secondary vacancies emerged in line with subsiding demand for emergency relocation.

Reflecting a nationwide sense that rents are undervalued, newly constructed buildings and structures that excel in disaster prevention/preparedness succeeded in absorbing demand and bringing about a trend toward improved vacancy rates. In Sapporo, newly constructed buildings are fully occupied. In Yokohama as well, the elimination of vacancies in buildings newly completed during the previous quarter continued, resulting in a major reduction of 0.9 percentage points in the vacancy rate. Prominent declines in vacancy rates also occurred in Kanazawa, Takamatsu and Kyoto, where vacancies declined by 1.5%, 0.9% and 0.7%, respectively.

In Sapporo, Fukuoka and other cities, scattered cases were observed of relocations due to proactive efforts at floor-space expansion, business expansion, and location or building upgrades, as part of an increasing trend focusing on business continuity. These and other factors are taken as indications of a trend where cutting costs is not the sole motivation for relocation. Polarization toward these trends is becoming increasingly prominent.